Last Thursday morning, the Bureau of Economic Analysis (BEA) released information on Q2 2022 Gross Domestic Product (GDP), a comprehensive measure of economic activity. Real (inflation-adjusted) GDP was negative for the second consecutive quarter. BEA data indicated that the economy contracted -0.9% in the second quarter, following a decline of -1.6% in the first quarter. Growth in consumer demand, roughly 70% of GDP, was positive in the second quarter, but not enough to offset the negative effects from the change in inventories and residential investment.
While you may hear that two consecutive quarters of negative GDP indicates a recession, that is not the official definition. The National Bureau of Economic Research (NBER), a private, nonpartisan organization that has analyzed economic data since 1920 and is the arbiter of US recessions, defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”1 The NBER emphasizes that a recession must broadly influence the economy, and makes no mention of GDP or consecutive quarters of economic slowdown in their definition.
The NBER committee reviews a broad range of economic activity that includes measures such as unemployment, personal income, personal consumption, retail sales, and industrial production.2 Many areas of the economy are still strong, such as labor (unemployment stands near a 50-year low3 and the US added jobs every month so far this year).4 Additionally, prior quarters of GDP can be revised up (or down) as more data is analyzed and compiled. There were two instances since 1947 that the NBER declared recession without having two consecutive quarters of negative GDP (1960 and 2001), in addition to calling a recession in early 2020 before they had two full quarters of data (which, to no surprise, were both negative). Perhaps this could be the first time we have two consecutive quarters of negative GDP without the NBER declaring recession. However, even if NBER declares this period a recession, we expect it to be a relatively short and shallow recession, with several other economic factors indicating the economy still has areas of strength to help expedite the recovery.
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1 National Bureau of Economic Research